Accounting Principles, 7th Edition

Weygandt • Kieso • Kimmel

Chapter 2

The Recording Process

Prepared by Naomi Karolinski

Monroe Community College
and
Marianne Bradford
Bryant College

John Wiley & Sons, Inc. © 2005

CHAPTER 2
THE RECORDING
PROCESS
After studying this chapter, you should be able to:

1 Explain what an account is and how it

helps in the recording process
2 Define debits and credits and explain
how they are used to record business
transactions
3 Identify the basic steps in the
recording process
4 Explain what a journal is and how it
helps in the recording process
CHAPTER 2
THE RECORDING
PROCESS
After studying this chapter, you should be able to:

5 Explain what a ledger is and how it

helps in the recording process
6 Explain what posting is and how it helps
in the recording process
7 Prepare a trial balance and explain its
purpose
 THE ACCOUNT
STUDY OBJECTIVE 1

• An account is an individual
accounting record of increases
and decreases in a specific asset,
liability, or owner’s equity item.
• There are separate accounts for
the items we used in transactions
such as cash, salaries expense,
accounts payable, etc.
 BASIC FORM OF ACCOUNT
STUDY OBJECTIVE 2

• The simplest form an account consists of

1 the title of the account
2 a left or debit side
3 a right or credit side
• The alignment of these parts resembles the
letter T = T account
Title of Account

Left or debit side Right or credit side

Debit balance Credit balance

 DEBITS AND CREDITS

• Debit indicates left and Credit indicates right

• Recording $ on the left side of an account is
debiting the account
• Recording $ on the right side is crediting the
account
• If the total of debit amounts is bigger than
credits, the account has a debit balance
• If the total of credit amounts is bigger than
debits, the account has a credit balance
TABULAR SUMMARY COMPARED
TO ACCOUNT FORM
DEBITING AN ACCOUNT

Cash
Debits Credits
15,000

Example:
Example: The
Theowner
ownermakes
makesan aninitial
initial
investment
investmentof
of $15,000
$15,000totostart
start
the
thebusiness.
business. Cash
Cashisisdebited
debited
as
asthe
the owner’s
owner’s Capital
Capital is
is
credited.
credited.
CREDITING AN ACCOUNT

Cash
Debits Credits
7,000

Example:
Example: Monthly
Monthlyrent
rent of
of $7,000
$7,000is
ispaid.
paid.
Cash
Cashis
iscredited
creditedas as Rent
Rent
Expense
Expenseisisdebited.
debited.
DEBITING / CREDITING AN
ACCOUNT

Cash
Debits Credits
15,000 7,000
8,000

Example:
Example: Cash
Cashisisdebited
debitedforfor $15,000
$15,000
and
and credited
credited for
for $7,000,
$7,000,leaving
leaving
aadebit
debitbalance
balanceofof $8,000.
$8,000.
 DOUBLE-ENTRY SYSTEM

• equal debits and credits made

accounts for each transaction
• total debits always equal the total
credits
• accounting equation always stays
in balance

Assets Liabilities Equity

DEBIT AND CREDIT EFFECTS —
ASSETS AND LIABILITIES

Debits Credits
Increase assets Decrease assets
Decrease liabilities Increase liabilities
 NORMAL BALANCE

• every account has a

designated normal balance.
– It is either a debit or credit.

• accounts rarely have an

abnormal balance.
NORMAL BALANCES — ASSETS
AND LIABILITIES
Assets
Increase Decrease

•Normal Balance

Liabilities
Debit
Decrease Increase
Credit
Normal
Balance
DEBIT AND CREDIT EFFECTS —
OWNER’S CAPITAL

Debits Credits
Decrease owner’s capital Increase owner’s capital
NORMAL BALANCE — OWNER’S
CAPITAL
Owner’s Capital
Decrease Increase

Normal
DebitBalance
Credit
DEBIT AND CREDIT EFFECTS —
OWNER’S DRAWING

Debits Credits
Increase owner’s drawing Decrease owner’s
drawing

Remember,
Remember,Drawing
Drawingisisaacontra-account
contra-account––an
anaccount
accountthat
thatisis
backwards
backwardsfrom
fromthe
theaccount
accountititaccompanies
accompanies(the
(theCapital
Capital
account).
account).
NORMAL BALANCE — OWNER’S
DRAWING
Owner’s Drawing
Increase Decrease

Normal
Balance
Debit
Credit
DEBIT AND CREDIT EFFECTS —
REVENUES AND EXPENSES

Debits Credits
Decrease revenues Increase revenues
Increase expenses Decrease expenses
 NORMAL BALANCES —
REVENUES AND EXPENSES
Revenues
Decrease Increase

Normal
Balance

Expenses
IncreaseDebit
Decrease
Credit
Normal
Balance
 EXPANDED BASIC EQUATION
AND DEBIT/CREDIT RULES AND
EFFECTS
Assets = Liabilities + Owner’s Equity

Owner’s Owner’s
Assets = Liabilities + -
Capital Drawing
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
+ - - + - + + -

+ Revenues - Expenses

Dr. Cr. Dr. Cr.

- + + -
Which of the following is not true of the
terms debit and credit.
a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and
decrease.
c. They can be used to describe the balance of an
account.
d. They can be interpreted to mean left and right.

Chapter 2
Which of the following is not true of the
terms debit and credit.
a. They can be abbreviated as Dr. and Cr.
b. They can be interpreted to mean increase and
decrease.
c. They can be used to describe the balance of an
account.
d. They can be interpreted to mean left and right.

Chapter 2
 THE RECORDING
PROCESS
STUDY OBJECTIVE 3

1 analyze each transaction (+, -)

2 enter transaction in a journal
3 transfer journal information to
ledger accounts
 THE JOURNAL
STUDY OBJECTIVE 4

• Transactions
– Are initially recorded in chronological
order before they are transferred to the
ledger accounts.
• A general journal has
1 spaces for dates
2 account titles and explanations
3 references
4 two amount columns
 THE JOURNAL
A journal makes several contributions to
recording process:
1 discloses in one place the complete effect of a
transaction
2 provides a chronological record of transactions
3 helps to prevent or locate errors as debit and
credit amounts for each entry can be compared
 JOURNALIZING

• Entering transaction data in the journal

is known as journalizing.
• Separate journal entries are made for
each transaction.
• A complete entry consists of:
1 the date of the transaction,
2 the accounts and amounts to be
debited and credited,
3 a brief explanation of transaction.
 TECHNIQUE OF
JOURNALIZING
The
The date
date of
of the
the transaction
transaction is
is entered
entered into
into the
the
date
date column.
column.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000
(Purchased equipment for
cash)
 TECHNIQUE OF
JOURNALIZING
The
The debit
debit account
account title
title is
is entered
entered at at the
the extreme
extreme
left
left margin
margin ofof the
the Account
Account Titles
Titles and
and Explanation
Explanation
column.
column. The The credit
credit account
account title
title is
is indented
indented on
on the
the
next
next line.
line.
GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000
(Purchased equipment for
cash)
 TECHNIQUE OF
JOURNALIZING
The
The amounts
amounts for for the
the debits
debits are
are recorded
recorded in in the
the
Debit
Debit column
column andand the
the amounts
amounts forfor the
the credits
credits are
are
recorded
recorded in
in the
the Credit
Credit column.
column.
 TECHNIQUE OF
JOURNALIZING
AA brief
brief explanation
explanation of
of the
the transaction
transaction is
is given.
given.
 TECHNIQUE OF
JOURNALIZING
AA space
space is
is left
left between
between journal
journal entries.
entries. The
The
blank
blank space
space separates
separates individual
individual journal
journal entries
entries
and
and makes
makes the the entire
entire journal
journal easier
easier to
to read.
read.

GENERAL JOURNAL J1
Date Account Titles and Explanation Ref. Debit Credit
2005
Sept. 1 Cash 15,000
R. Neal, Capital 15,000
(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000
(Purchased equipment for
cash)
 TECHNIQUE OF
JOURNALIZING
The
Thecolumn
column entitled
entitledRef.
Ref.is
is left
leftblank
blank at
atthe
the time
time
journal
journal entry
entryisismade
madeand
andisisused
usedlater
later when
whenthe the
journal
journal entries
entriesare
aretransferred
transferredto tothe
theledger
ledger
accounts..
accounts
 SIMPLE AND COMPOUND
JOURNAL ENTRIES

IfIf an
an entry
entry involves
involves only only two
two accounts,
accounts, one
one debit
debit
and
and oneone credit,
credit, itit is
is considered
considered aa simple
simple entry.
entry.
 COMPOUND JOURNAL
ENTRY
When
When three
three or
or more
more accounts
accounts are are required
required inin
one
one journal
journal entry,
entry, the
the entry
entry is
is referred
referred to
to as
as aa
compound
compound entry.
entry.

3
 COMPOUND JOURNAL
ENTRY
This
Thisis
isthe
thewrong
wrongformat;
format; all
alldebits
debitsmust
mustbe
belisted
listed
before
beforethe
thecredits
creditsare
arelisted.
listed.
 THE LEDGER
STUDY OBJECTIVE 5

A Group of accounts maintained by a

company is called the ledger.
A general ledger contains all the
assets, liabilities, and owner’s
equity accounts
POSTING A JOURNAL ENTRY

In the ledger, enter in the appropriate columns of the account(s)

debited the date, journal page, and debit amount shown in the journal.
POSTING A JOURNAL ENTRY

In the reference column of the journal, write the account

number to which the debit amount was posted.
 POSTING A JOURNAL ENTRY

GENERAL LEDGER
CASH NO. 10
Date Explanation Ref. Debit Credit Balance
2005
Sept. 1 J1 15,000 15,000

In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in
the journal.
POSTING A JOURNAL ENTRY

In the reference column of the journal, write the account number to which the
credit amount was posted.
 CHART OF ACCOUNTS

AAChart
Chart of
of Accounts
Accounts lists
lists the
theaccounts
accountsand andthe
the
account
account numbers
numberswhich
whichidentify
identifytheir
theirlocation
locationin
inthe
the
ledger.
ledger.
 INVESTMENT OF CASH BY
OWNER
October 1, C.R. Byrd invests $10,000 cash in an
Transaction advertising business known as:
The Pioneer Advertising Agency.

Basic •The asset Cash is increased $10,000

Analysis •Owner’s equity, C. R. Byrd, Capital is increased
$10,000.

Debits increase assets: debit Cash $10,000.

Debit-Credit
Credits increase owner’s equity: credit C.R. Byrd,
Analysis Capital $10,000.
 PURCHASE OF OFFICE
EQUIPMENT
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 INVESTMENT OF CASH BY
OWNER
October 1, C. R. Byrd purchases $5,000 of
Transaction equipment by issuing a 3-month, 12% note
payable.

Basic •The asset Office Equipment is increased $5,000.

Analysis •The liability, Notes Payable is increased $5,000.

Debits increase assets: debit Office Equipment

Debit-Credit
$5,000.
Analysis Credits increase liabilities: credit Notes Payable
$5,000.
 PURCHASE OF OFFICE
EQUIPMENT
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 RECEIPT OF CASH FOR
FUTURE SERVICE
October 2, a $1,200 cash advance is received from a
Transaction client, for advertising services expected to be
completed by December 31.

Asset Cash is increased $1,200

Liability Unearned Fees is increased $1,200
Basic •Service has not been rendered yet.
Analysis
Liabilities often have the word “payable” in their
title, Unearned fees are a liability.

Debits increase assets: debit Cash $1,200.

Debit-Credit
Credits increase liabilities: credit Unearned Fees
Analysis $1,200.
 RECEIPT OF CASH FOR
FUTURE SERVICE
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PAYMENT OF MONTHLY
RENT

October 3, office rent for October is paid in cash,

Transaction $900.

Basic The expense Rent is increased $900

Analysis Payment pertains only to the current month
Asset Cash is decreased $900.

Debit-Credit Debits increase expenses: debit Rent Expense $900.

Analysis Credits decrease assets: credit Cash $900.
 PAYMENT OF RENT
EXPENSE
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
PAYMENT FOR INSURANCE

October 4, $600 Paid one-year insurance policy-

Transaction expires next year on September 30.

-Asset Prepaid Insurance increases $600

-Payment extends to more than the current month
Basic -Asset Cash is decreased $600.
Analysis -Payments of expenses benefiting more than one
period are prepaid expenses or prepayments.

Debit-Credit Debits increase assets: debit Prepaid Insurance

Analysis $600. Credits decrease assets: credit Cash $600.
 PAYMENT FOR
INSURANCE
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING

Prepaid Insurance 130

Oct. 4 600
 PURCHASE OF SUPPLIES
ON CREDIT

October 5, an estimated 3-month supply of

Transaction advertising materials is purchased on account from
Aero Supply for $2,500.

Basic The asset Advertising Supplies is increased $2,500;

Analysis the liability Accounts Payable is increased $2,500.

Debits increase assets: debit Advertising Supplies

Debit-Credit
$2,500. Credits increase liabilities: credit
Analysis Accounts Payable $2,500.
 PURCHASE OF SUPPLIES
ON CREDIT
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 HIRING OF EMPLOYEES

October 9, hire four employees to begin work on

October 15. Each employee is to receive a weekly
Transaction salary of $500 for a 5-day work week, payable every
2 weeks -- first payment made on October 26.

A business transaction has not occurred only an

Basic agreement between the employer and the
Analysis employees to enter into a business transaction
beginning on October 15.

Debit-Credit A debit-credit analysis is not needed because there

Analysis is no accounting entry.
WITHDRAWAL OF CASH BY
OWNER

October 20, C. R. Byrd withdraws $500 cash for

Transaction personal use.

Basic The owner’s equity account C. R. Byrd, Drawing is

Analysis increased $500.
The asset Cash is decreased $500.

Debits increase drawings: debit C. R. Byrd,

Debit-Credit
Drawing $500. Credits decrease assets: credit
Analysis Cash $500.
WITHDRAWAL OF CASH BY
OWNER
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 PAYMENT OF SALARIES

October 26, employee salaries of $4,000 are owed

Transaction and paid in cash. (See October 9 transaction.)

Basic The expense account Salaries Expense is increased

Analysis $4,000; the asset Cash is decreased $4,000.

Debit-Credit Debits increase expenses: debit Salaries Expense

Analysis $4,000. Credits decrease assets: credit Cash
$4,000.
 PAYMENT OF SALARIES

JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
Salaries Expense 726
Oct. 26 4,000
RECEIPT OF CASH FOR FEES
EARNED
October 31, received $10,000 in cash from Copa
Transaction Company for advertising services rendered in
October.

Basic The asset Cash is increased $10,000; the revenue

Analysis Fees Earned is increased $10,000.

Debit-Credit Debits increase assets: debit Cash $10,000. Credits

Analysis increase revenues: credit Fees Earned $10,000.
RECEIPT OF CASH FOR FEES
EARNED
JOURNAL
JOURNALENTRY
ENTRY

POSTING
POSTING
 THE TRIAL BALANCE
STUDY OBJECTIVE 7

• The trial balance is a list of accounts and

their balances at a given time.

• The primary purpose of a trial balance is

to prove debits = credits after posting.

• If debits and credits do not agree, the

trial balance can be used to uncover
errors in journalizing and posting.
 THE TRIAL BALANCE

The Steps in preparing the Trial Balance are:

1. List the account titles and balances
2. Total the debit and credit columns
3. Prove the equality of the two columns
A TRIAL BALANCE

The total
debits must
equal the total
credits.
 LIMITATIONS OF A
TRIAL BALANCE
• A trial balance does not prove all transactions
have been recorded or the ledger is correct.

• Numerous errors may exist even though the

trial balance columns agree. For example, the
trial balance may balance even when:
– a transaction is not journalized
– a correct journal entry is not posted
– a journal entry is posted twice
– incorrect accounts used in journalizing or
posting
– offsetting errors are made in recording
Which one of the following represents the expanded
basic accounting equation?

a. Assets = Liabilities + Owner’s Capital + Owner’s

Drawings – Revenue - Expenses.
b. Assets + Owner’s Drawings + Expenses = Liabilities
+ Owner’s Capital + Revenue.
c. Assets – Liabilities – Owner’s Drawings = Owner’s
Capital + Revenue – Expenses.
d. Assets = Revenue + Expenses – Liabilities.

Chapter 2
Which one of the following represents the expanded
basic accounting equation?

a. Assets = Liabilities + Owner’s Capital + Owner’s

Drawings – Revenue - Expenses.
b. Assets + Owner’s Drawings + Expenses = Liabilities
+ Owner’s Capital + Revenue.
c. Assets – Liabilities – Owner’s Drawings = Owner’s
Capital + Revenue – Expenses.
d. Assets = Revenue + Expenses – Liabilities.

Chapter 2
 COPYRIGHT
COPYRIGHT

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